Momentum for Mobile Money by skd53191


									Momentum for Mobile Money
By Peter Lucas

With mobile devices reaching ubiquity and consumers showing signs of wanting payments and other
financial services on their handsets, banks, processors, and wireless carriers are lining up to cash in.
First, though, they’ll have to hash out some key disagreements.

Forget all the talk that U.S. consumers aren’t ready to embrace m-commerce. Those collectively known as Gen Y, consumers born
between 1979 and 1995, are not only pushing m-commerce forward by downloading ring tones and games to their phones, they are
demanding broader transactional capabilities from their phones.
    At more than 70 million strong—which rivals the size of the Baby Boomer generation—Gen Y has been raised on technological
convenience, which makes them more accepting of new purchasing methods, such as m-commerce, than preceding generations. As a
result, Gen Y has come to view the mobile phone as an integral part of its lifestyle.
    Besides communications, text messaging, and ring-tone and game downloads Gen Y uses the phone as a multipurpose device for
delivering music, Internet access, video, telecasts of live sporting events, and transactions. Plus, they are active consumers regardless of
their age. The youngest already use prepaid cards and gifts cards to make purchases online and in the store.
    All these factors are creating a huge opportunity for financial-services providers, cellular carriers, and merchants to cash-in on m-
    “The younger generations moving into the economy are highly tuned into the mobile phone as being more than a simplistic
communications device,” says Mohammad Khan, president and founder of ViVOtech Inc., a Santa Clara, Calif.-based provider of m-
wallet applications and radio-frequency transceivers for contactless payments. “This is enabling mobile technology [and] payments to
converge in this space.”
    Still, m-commerce faces a fragmented market when it comes to the technology being used to facilitate transactions and the types of
applications being made available to consumers.
    “There are a lot of barriers yet to be overcome before m-commerce is mass-adopted,” warns Nitesh Patel, a senior analyst with
Strategy Analytics, a Newton, Mass.-based research and consulting firm. “There are some difficulties at this stage to drive the business
    As a result, many players are hedging their bets by experimenting with the two primary technological platforms that have emerged
over the past year or so: NFC (near-field communication) chips embedded in the phone that can be used to initiate transactions with
point-of-sale terminals, or SIM-chip (subscriber identity module) management of downloads of mobile-banking and bill-payment
applications, which then reside in the SIM. The belief is that point-of-sale payments (POS), mobile banking, and bill payment will
converge in the phone using one or both of these technologies.
    “POS, bill pay, and mobile banking are separate applications, but they are part of the value proposition of m-commerce,” says Mark
Collins, vice president for long-term products and services planning for Cingular Wireless, which in December was acquired by AT&T
Inc. along with parent Bell South Corp. “Right now our focus is what provides the best customer experience.”

Different Ideas
For Cingular that is mobile banking and bill payment, though the company is testing NFC technology in New York as part of a trial
involving several hundred Citibank users and co-sponsored by MasterCard Worldwide.
    The pilot, which was scheduled to begin Jan. 10, provides participants with an open environment in which to use their phones for
payment. The merchant base includes three subway stations, as well as merchant locations in New York that accept contactless
    “We feel there is an opportunity for NFC to do greater things beyond payment, and we see this as a learning experience,” says
Collins. “But right now our primary interest is mobile banking and bill payment because consumers seem to have a higher level of
comfort with those applications.”
    Collins’s banking counterparts, though, have somewhat different ideas, and right now these seem to revolve around using handsets
for contactless POS payments. Banks and the card associations have tested NFC payment around the world, but in the U.S. the tests so
far have included a trial at a sports stadium in Atlanta and now open pilots in progress in Dallas and New York.
    What separates the New York and Dallas pilots from the Atlanta trial is that users can download the payment applications and their
account information onto the phone instead of having it preloaded. The process, known as over-the-air personalization (OTA), broadens
the range of transaction information that can be accessed on the phone, extending it to such things as electronic receipts and account
    More important, it enables financial institutions to retain control over transactions, because the application used for account access
and payments resides on the NFC chip, which, unlike the SIM chip, does not require access to the wireless network to launch an
application. Consumers can initiate a POS transaction by waving an NFC-equipped phone in front of a POS terminal from about four
centimeters. Signatures are typically not required on transactions of $25 or less.
    “We will support members that want to test phones for applications other than payment, but getting payment-account information on
to the NFC chip is something we have been focusing on,” says Oliver Steeley, vice president at MasterCard’s Mobile and Wireless
Center for Excellence.

’Dumb Pipes’?
M-commerce remains a nascent technology, so neither the card networks nor the wireless carriers can be certain which direction it will
take. What both parties know is they don’t want to be a bystander watching as the other rakes in what could be huge profits.
    The risk for banks from loading applications onto the SIM chip is that access to the chip is controlled by the cellular networks. A SIM
makes it possible for wireless subscribers to communicate with their banks or merchants via the handset, which opens the door for
banking, bill payment, and eventually point-of-sale transactions and the data that wrap around the transactions.
    If wireless carriers choose to, they can lock up the chip until they can strike their preferred deal with financial-service providers.
While Cingular’s Collins insists the network has no intention of becoming a financial-services provider itself, industry experts add the
wireless operators don’t want to provide free access to their networks.
    “The networks aren’t looking to be dumb pipes,” says Kyle Cochran, product manager for Atlanta-based Firethorn Holdings LLC,
which is working with Cingular and Atlanta-based CheckFree Corp., a provider of electronic bill-payment applications, to deliver
mobile banking and bill payment to financial institutions.
    “The networks see their services as a way to provide convenience and value to their subscribers,” he continues. “They are not in a
position to provide financial services, but they can still add value.”
    That the value resides in the service has always been at the heart of the business model used by the cellular networks. Wireless
carriers earn money on the sale of calling plans that can include Internet access or purchases charged to the user’s cellular account. M-
commerce is considered a value-added service.
    To encourage mass adoption of their service, the cellular carriers subsidize the cost of the handsets. These subsidies also make it
cheaper for consumers to acquire the latest phones capable of supporting new functions for which the carriers can charge a fee, such as
    “As a rule, wireless handsets sold through our retail outlets are subsidized,” explains Cingular’s Collins. “The value is in the service,
more so than the device.”
    Given that point of view, the wireless networks are not inclined to incur further costs by underwriting some or all of the costs of an
NFC chip, particularly when the alternative lies in SIM technology they’ve already adopted and that hands them control over access to
financial services.
    Nor are the card companies eager to pay for NFC. They’ve spent decades and billions of dollars to build brand recognition and their
own transaction networks. Lately, they’ve poured even more into incentives to encourage merchant adoption of contactless terminals.
The carriers, they say, should foot the costs of NFC.
    “We are hesitant to invest in mobile platforms,” says MasterCard’s Steeley. “But we do believe the phone can do more around a
transaction than a card. If consumers value the functionality of m-commerce enough some network-services provider will put the NFC
chip into the handset to gain that share of the market.”

An ‘NFC Strategy’
Yet NFC technology has several clear advantages. These include faster POS transactions, seconds compared to minutes for browser-
based payment applications. NFC-equipped phones also eliminate having to navigate a Web browser to access the applications, as is the
case with mobile banking and bill payment. Proponents of NFC technology say not having to access a Web browser on the phone
creates a more satisfying user experience.
    More important for banks, NFC chips allow them to retain direct control over the transaction, since they separate transactional
capabilities from the SIM chip. This eliminates any need to interact with the carrier network to communicate with the POS terminal.
    “NFC chips are designed to be backwards-compatible with contactless terminals at the point of sale and that is what merchants need
to embrace m-commerce,” says ViVOtech’s Khan. “Once merchants can accept a contactless card, they can accept a transaction from a
phone with an NFC chip.”
    The downside to the technology is that only about 36,000 merchants worldwide accept contactless cards, the bulk of which are in
the U.S., according to MasterCard. That number may well increase over time, but for now it further complicates the case for
underwriting some or all of the cost of specifying phones with NFC.
    “There aren’t a lot of merchant locations where NFC-enabled phones can be used right now and we are already subsidizing the retail
cost of the handset,” says Cingular’s Collins, who adds Cingular has 60 million subscribers. “To replace existing phones with handsets
that have NFC capability will take multiple product cycles to get deep into the subscriber base. We prefer to let consumers move to
these phones through natural attrition, which occurs every 12 to 18 months.”
    The card companies counter that NFC technology is a replacement for cash transactions, which limits its potential merchant base.
Further, they argue the carriers’ focus on NFC for payments is too narrow.
    “Cash-based merchants such as fast-food restaurants and pharmacies are the target, not merchants that already generate substantial
card volume,” says Steeley. “The business case for all parties is a bit of a challenge, but we aren’t going to re-engineer our strategy to
help carriers recoup their investment in the m-commerce infrastructure.”
    Steeley points out that MasterCard continues to test other types of NFC form factors, such as key fobs. “Phones are part of our
strategy,” he says. “We understand that carriers want a slice of the pie, but they can’t necessarily look to the payments industry to recoup
their investment in m-commerce infrastructure. What the wireless carriers need is an NFC strategy, not necessarily an m-commerce

Still, the card companies recognize that consumers will eventually want to access more content around the transaction, as well as
account information and other types of financial services, through the phone, which is why they are working to bring OTA download
capabilities to consumers.
    MasterCard rolled out the concept of allowing consumers to load payment applications to the phone with a six-month pilot launched
last November in Dallas. The pilot includes up to 500 7-Eleven customers enrolled in the convenience-store chain’s Speak Out wireless
program, allowing participants to make transactions at any of MasterCard’s 36,000 merchants with contactless terminals.
    The New York pilot builds on this the concept. Participating Citi customers were required to bring their cards to a special event at
which they were instructed on how to load their account data onto Nokia phones equipped with NFC chips from a secure server using
    “The real value of the using the phone as a transaction device is downloading of information that can be wrapped around the
transaction,” explains Mike Friedman, until recently director of the emerging-technologies practice for Mercator Advisory Group, a
Waltham, Mass.-based research and consulting firm.
    One potential benefit of OTA for carriers is that the downloads rely on wireless networks, giving carriers the opportunity to
include the service as part of their subscription fees. At the same time, banks and the card associations like it because it doesn’t give
carriers control over the payments application itself.
    The NFC chip initiates POS transactions and stores transaction data. Transaction and account data are stored on the chip, which
requires entry of a PIN, thus protecting the data in the event a phone is lost or stolen. In contrast, phones with applications loaded onto a
SIM chip can be disabled by the cellular carrier if lost or stolen, even though account data are stored on a secure remote server.
    “The infrastructure to use the phone to deliver m-commerce applications of value to consumers and merchants is in place and that is
creating a convergence of payment providers, wireless networks, and cell-phone makers in the market,” says Khan of ViVOtech, which
is working with the co-sponsors of the New York NFC trial. For example, he says, “The advantage of downloading a coupon to the
NFC chip is that users can redeem it at the point of sale. We expect to see commercial rollout of these types of applications in about 18
    Visa, too, is working to make it easier for members to create m-commerce applications with a broader array of services beyond
payment using OTA. In January, Visa announced an m-commerce platform that will enable members to deliver mobile contactless
payments, remote payments, person-to-person payments, and coupons, in addition to performing account management.
    The platform, scheduled to become available later this year, is expected to eventually support person-to-person payments, a market
into which PayPal is aggressively moving (box, page 34). Visa began testing OTA technology at its corporate campus last November.

Mobile Banking
Not all financial institutions and payments experts agree with the idea that NFC chips and increased information surrounding POS
transactions are going to drive the m-commerce market forward. “Consumers are going to trust the phone to deliver content before they
entrust it to access their personal financial data,” says Friedman.
     The content consumers are predicted to want is account information, also known as mobile banking. This opens the door to bill
payment, which mobile proponents are convinced paves the road to mass consumer interest in m-commerce transactions.
     Tupelo, Miss.-based BankcorpSouth is an excellent example of this school of thought. BankcorpSouth conducted a 34-day pilot
with CheckFree and Firethorn, which ended Dec. 31. Although brief, the pilot was intended to provide a glimpse into how consumers
respond to and use mobile banking and bill payment before launching a larger-scale effort, according to Michael Lindsey, senior vice
president and manager of delivery services for the bank. About 200 customers participated.
     What prompted the bank to embrace SIM-based mobile banking and bill payment over NFC technology was the cost of the NFC chip.
“We couldn’t justify issuing chip cards, but we felt the handset was the next generation of payments,” explains Lindsey. “We decided to
provide more functionality through the handset using mobile banking and bill payment as a way to evolve it into a transaction device.”
     CheckFree provided the bill payment software and Firethorn enabled the application to be hardware- and network-compatible. In
this case, the network used was Cingular. Using this model, wireless carriers can charge for m-banking and bill-payment services in
their subscriber packages. BankcorpSouth, which advertised the program on its Web site using a banner ad and netted three times the
expected response, can charge for bill payment and m-banking, if it chooses.
     Initial consumer feedback indicated that users in the pilot were not typical Internet banking consumers, but rather consumers with
a mobile lifestyle where activities are more fluid than scheduled. “This changed our perception,” says Lindsey, who adds customers
used the application several times a day.
     “Internet banking and bill payment does not necessarily fit with the lifestyle of mobile users,” continues Lindsey. “Mobile users
depend on their phone for more than communications, because they are not at home much throughout the day. Mobile banking is the
first logical step to making transactions with the phone.”

Rising Wave
Some bankers also contend that even though Gen Y and subsequent generations are likely to have a natural affinity for m-commerce,
they still need to sell Baby Boomers and Gen Xers on the concept. To do this will require not only a broader merchant base, but a
wider availability of phones equipped either with NFC chips or software in the SIM to conduct m-commerce transactions.
    “It is going to take more than banks to get m-commerce moving forward,” says Ilieva Ageenko, director of emerging applications
for Charlotte, N.C.-based Wachovia Corp., which in December launched an m-banking service with 5,000 users. “Phones with this
capability need to be widely available and more merchants need to get on board.”
    In the meantime, Wachovia plans to introduce its customers to m-banking and track the development of the m-commerce
marketplace before expanding the capabilities of the service. “As we get customer feedback, we can prioritize the functionality, such
as adding biometric authentication,” she adds. “Expansion is about finding applications customers consider to be of value.”
    That will no doubt be the key that ultimately unlocks the m-commerce market for card networks, processors, and banks. In the
meantime, they can ride the rising wave of mobile users. “The growth of mobile services is outstripping the growth in financial
services, especially in developing economies,” says MasterCard’s Steeley. “Our focus is to use mobile services to grow financial
services faster.”

                      PayPal’s Multipronged M-Commerce Play, Including P2P
One m-commerce market banks and processors have more or less ignored is the potentially fertile field of person-to-person payments.
A raft of startups have appeared in the past year or so to fill the void, but, not surprisingly, the early leader here is PayPal Inc., which
pioneered P2P for e-commerce and has since become the favored form of payment on parent eBay Inc.’s online auctions.
    San Jose, Calif.-based PayPal launched PayPal Mobile last April in the United States and Canada, and two months later in the
United Kingdom, as a way for consumers to exchange money between individuals and make purchases from original equipment
manufacturers (OEM) and brands, such as professional sports leagues. Although PayPal declines to reveal the number of
accountholders, it does say PayPal Mobile has enjoyed healthy adoption in all three markets.
    In this increasingly crowded market, PayPal may have a natural advantage in the 122.5 million accounts it claims for its e-
commerce service, almost 31 million of which are active. “Just as PayPal helped to facilitate e-commerce, PayPal Mobile will do the
same for m-commerce,” says Kevin Dulsky, general manager of PayPal Mobile. “PayPal Mobile is a way to put m-commerce in front
of the consumer whether they are at work, play, or shopping.”
    Although PayPal Mobile is branching out into direct-to-consumer sales and charitable donations, P2P remains the heart of its
business model. Accountholders have used the PIN-secured service to send monetary gifts, repay a loan from a buddy, and send their
share of rent to a roommate who has fronted part of the bill. Users tap out a text message to a PayPal code that includes the recipient’s
mobile number and the amount they want to send. The funds are transferred into the recipient’s PayPal account, where they can be
used to make m-commerce or e-commerce purchases or be loaded onto a prepaid debit card.
    For Text to Buy, the merchant service, users text a product identifier to a unique merchant short code to trigger a PayPal transaction
for the purchase amount. For example, a record label promoting a hit CD might create a short code of *86 and the artist’s name or *86
and the CD’s title.
    Consumer brands in various industries have included PayPal Mobile codes in print and online ads as a way to capture impulse
purchases. “In many cases there is a drop-off on the impulse to buy after seeing an ad if the consumer has to travel to a store or has no
immediate online access,” explains Dulsky. “The ease of action provided by PayPal Mobile encourages impulse purchases.”
    The list of OEMs and brands selling direct to consumers through PayPal Mobile include Fox Home Entertainment (DVDs), Sony
BMG (CDs), NBC/Bravo (television-show merchandise), and the National Basketball Association (team- and league-related
merchandise). Most of the items sold through PayPal Mobile cost $10 to $100, which fits the PayPal business model of targeting small
to mid-size tickets.
    “One of the benefits of providing a direct-to-consumer outlet for sellers is that they can reach an audience they can’t necessarily
reach at the retail level and they can gather consumer data,” says Dulsky.
    PayPal Mobile has also opened up a new channel for charities to collect donations. Typically, donations are solicited at live events,
such as concerts or rallies, in which consumers are encouraged to dial-up the charity’s account to donate a predetermined amount. For
example, a performer at a concert for famine relief might ask the audience to donate $10 via by dialing the charity’s short code.
“There are different media channels people use through the day to make purchasing decisions and purchases,”
says Dulsky. “Our aim is to be there to facilitate purchases over the phone and the Internet.”

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